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Managing Ecological Investment Risk

by Carsten Henningson

Author Carsten Henningson of Portfolio 21

There is one complex term to describe our future: limited biocapacity. The earth’s limited biocapacity is the greatest challenge we face as investors and as humans. We are already facing it, but the severity of its effects depends on where you live and how much money you have.

The planet provides some amazing ecosystem services for our economy. It recycles our polluted air and dirty water; it provides timber, cropland, and many other raw materials and support services. When I was born in 1960, the ecological footprint of the world economy consumed about half of the earth’s resource capacity. In other words, our 1960 world economy consumed less than what the earth was able to renew, recycle, or produce as ecosystem services. Twenty five years later the ecological footprint of the world economy doubled. In 1985, we hit the threshold of using everything the planet could renew, recycle, or produce each year. If the ecological footprint of our world economy had stayed at this level, society’s demand on nature would be in balance with nature’s capacity to meet that demand-assuming we had transitioned from oil to renewable energy. But that’s not what happened.

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Fast forward to 2007-we have super sized everything and we keep on multiplying and consuming like never before. We now use the planet’s resources faster than they can regenerate. We are able to keep growing and consuming because we are liquidating ecological capital rather than living off annual yields. Today our ecological footprint is over 20 percent larger than the planet can regenerate. From a money management perspective, what if year after year your expenses were more than your income and you had to dip into savings to make ends meet? It is simply not sustainable or possible. Investors will need to readjust their return expectations because the earth does not have the biocapacity to sustain this growth. It is not physically possible. Past performance is no guarantee and is actually a false indicator of future return.

During my 47 years on the planet, the world’s population has doubled to six billion people and is expected to reach nine billion in roughly another 45 years. The majority of our new global citizens are born into poverty. As demand for precious resources such as oil and water increases, so does the disparity between rich and poor. Increasingly, it is only the rich who can afford what were once readily available natural resources-including clean air and drinking water. We are entering eco-apartheid; the economic and ecological advantages are going to the rich while the poor suffer.

We have learned that when the global community fails to meet the very basic needs of all people, there is conflict, terrorism, and war. Although it is sometimes easier to live in the denial and relative luxury of our comfortable homes, this is the world in which we live. The chance of turning this crisis around is small but possible. Because it is such a challenge, we must minimize the denial and start helping with the solution to increase our probability. At times we all feel like throwing up our hands in despair and deciding there is nothing we can personally do, but this reaction is not part of the solution.

Education and communication about the ecological crisis are essential. Increasingly, with the help of the internet and other independent media channels, the voice of public opinion is now beginning to shift the global community. The bandwidth of this voice is competing with corporate-owned media as we approach a tipping point. From the supermarket to the stock market and on to the voting booth, global public opinion is the next superpower positioning to change the direction of corporations and governments. Our voices can only be heard, and our votes can only be counted, when we speak out.

Many would say we have some serious environmental and investment challenges ahead. Some would say we are facing an ecological, and potentially financial, crisis. Regardless of your opinion of the severity of the situation, simply stated, our waste and pollution cannot systematically increase and our natural resources cannot systematically decrease.

Those of us reading this article will be insulated from the severity of the consequences for a while. We know that the people who have the least resources will suffer more and earlier. We know that so many are already suffering today. According to the United Nations, “a child dies every three seconds from extreme poverty.” In some parts of the world, people are fighting over food and water while others are experiencing abundance and economic wealth never before realized. This widening wealth disparity is survival of the financial fittest. We have allowed it to get this bad and unfortunately we will allow it to get much worse in order to protect ourselves from discomfort as long as possible.

SRI (socially responsible investing) has been largely about “doing well by doing good” for the people with the most money. We are entering a period in time when our choices are a matter of survival. As social investors, we need to pay attention to the fact that the earth can no longer provide the ecosystem services necessary to support our current consumption levels now or into the future. Not paying attention is reckless and certainly does not meet the definition of a prudent investor.

Most likely, the world’s stock markets will experience greater volatility, destabilization, and risk through the uncertainty of biocapacity and climate change. Investors may want to manage ecological portfolio risk by considering the issue of business models rather than short-term operating efficiencies. For example, companies that rely heavily on cheap oil for transportation of their raw materials, products, and labor need to rethink their approach. Their business model is effective only when there is unobstructed mobility, but the minute they run into limitations on movement of people and/or goods, the profit margin begins to deteriorate quickly.

With media and public opinion shifting toward an understanding of climate change impacts, it shouldn’t be a surprise to see multinational businesses attempting to paint a greener picture of a positive future in which they figure prominently. Wal-Mart and others have been in the news recently for their sustainability initiatives. Wal-Mart executives and consultants would like us to believe (and maybe they believe it themselves) that the company’s business model will be sustainable if they improve their fuel efficiency, sell more organic products, and make various other adjustments. Wal-Mart’s business model is unsustainable as long as it relies on cheap oil for transporting its goods, cheap labor for making and selling them and cheap land on which to build its huge stores, and even huger parking lots. Perhaps, in a world of unlimited biocapacity, Wal-Mart could continue to grow until it had populated every corner of the world, but that’s not reality. To pretend otherwise is to be in denial at best and deceitful at worst.

Wal-Mart is not alone. Unfortunately, for many corporations, the sustainability commitment is nothing more than “greenwashing.” Corporate responsibility departments and sustainability reporting are sprouting up everywhere. Investors need to look beyond the PR and investor relations press releases and dig deep to uncover the companies that are putting their investment money-not just their advertising budgets-into intelligent environmental business strategies. And, even more important, investors need to support companies that are imagining and building business models with a greater chance of surviving in an unstable economic climate.

There are substantive changes companies can make that should help to insulate them from disruption. These fall under the general category of decentralizing. For example, a large multinational corporation should weigh the benefits achieved through current economies of scale against the expected value of locating supplies, production, and customers as close together as possible and practical. The same is true of companies that depend on outsourced production facilities in distant places. While these manufacturing and distribution strategies are currently cheap, this may not prove true as climate change disruptions cause delays, unintended consequences, or inability to complete a contract. Companies positioned for the best chance for adaptation must understand the realities, risks, and potential opportunities facing their business models and, heaven forbid, envision a future beyond next quarter’s earnings.

As investors, we can support this kind of thinking by disciplining ourselves to take a long-term perspective with our investments. This is not to say that investors should be passive. On the contrary, a long-term perspective means that as investors we are doing enough research and self-education to be comfortable with the investment process, so that it isn’t necessary to evaluate the worth of the investment using quarterly returns as the only measure of success.

Today half of the 100 largest economies in the world are not countries. They are corporations with a mandate to maximize wealth for shareholders, at the expense of the environment, employees, and the community. Investors are a critical catalyst for transitioning the investment process to support investments that build-rather than erode-the natural, social and economic capital in communities worldwide.

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Henningson states: ” In 1985, we hit the threshold of using everything the planet could renew, recycle, or produce each year. If the ecological footprint of our world economy had stayed at this level, society’s demand on nature would be in balance with nature’s capacity to meet that demand-assuming we had transitioned from oil to renewable energy. But that’s not what happened.”

—- While I agree that transitioning to renewable energy in 1985 would have been a good idea, “balance with nature’s capacity” was exceeded not in 1985 but 10,000 years ago when humans began to leave hunter gathering behind.

When hunter gatherer numbers rose to overshoot the carrying capacity of the solar energy driven, virgin, ecologically complex, species diverse, self-managing, NUTRIENT CONSERVATIVE forest and grassland ecosystems that they relied on for their sustinence——starvation was the punishment / there were obvious limits.

As hunter gatherers, whose numbers had overshot the carrying capacity of these NUTRIENT CONSERVATIVE forests and grasslands, began to practice agriculture which fosters simple (often monocultural) plant associations and tillage practices that regularly leave soil bare and without any roots to hold back the leaching of plant nutrients down through the soil profile and on to the ocean—————- then the process of unsustainable mining of soil plant nutrients began. Humanity has been able for the last 10,000 years to avoid the consequences of this unsustainable soil nutrient depletion by opening up new forests and grasslands to access their nutrient stores until nutrient depletion forced migration onto new virgin soils. Moving to new continents with vast areas of of intact virgin forests and grasslands allowed the unsustainable depletion to continue.

The shift from total solar dependence toward increasing use of temporary supplies of exhaustible fossil energy allowed the manufacture of nitrogen fertilizer by the Haber Process in 1913 and the mining and long distance transport of Potassium, Phosphorus, Calcium and Magnesium etc fertilizer materials to replace those leached from the soil as a result of NUTRIENT LEAKY agriculture.

As we enter the post ‘Petroleum Interval’ era, this geological energy dependent fertilization will slowly become impossible. The total human eneterprise will only reachieve the “balance with nature’s capacity” that existed during the time of hunter gathering when the ANNUAL loss of plant nutrients from the soil is reduced to the levels that are produced by biological nitrogen fixation and weathering of inorganic soil minerals ANNUALLY.